Food Price Shocks Signal Need for Macro-Resilient Finance

Wildfires, floods, storms, and droughts, are putting unprecedented pressure on food crops, threatening to destabilize commodities markets that determine food prices, across the world. This is a major climate impact on market signals and a sign of emerging pervasive risk to the global economy.

A heatwave across swathes of North America, Europe and Asia, coupled with a worsening drought in some areas, is causing spikes in the prices of anything from wheat to electricity. Cotton plants are stunted in parched Texas fields, French rivers are too warm to effectively cool nuclear reactors and the Russian wheat crop is faltering.

The scorching heat is extracting a heavy human cost – contributing to floods in Japan and Laos and wildfires near Athens. Relief from soaring temperatures, which topped 30 degrees Celsius (86 degrees Fahrenheit) in the Arctic Circle, may not arrive for at least two weeks.

It’s a timely reminder of the vulnerability of global commodity markets to the changing climate, as human activity disrupts the behavior of plants, animals and the march of the seasons.

We are about to experience new stresses on household income across the economy. Commodities markets are designed to deal with such shocks; the way they do so is not designed to make sure nobody suffers, or even to make sure overall market value does not shrink.

While the United States is the world’s wealthiest country, somewhere between 1/8 and 1/7 of its people live in poverty and between 1/6 and 1/5 of its children suffer from food scarcity and hunger. Simultaneous staple crop failures on multiple continents could undermine the solvency of millions of households in the US.

While even the wealthiest economies are highly susceptible to food price shocks, financial planners in the public and private sectors are not well prepared to absorb a major economic adjustment transmitted through the human food supply. Food will become a spending priority for tens of millions, undermining new business in many other sectors.

Macro-critical resilience (the degree to which the macro-economy can resist structurally influential shocks) requires not only agility in the markets themselves, but an orientation toward economy-wide empowerment and adaptability. That means we need there to be more resources in more hands.

Recent reporting has cited the “mystery” as to why wages are stagnant in much of the world, while economic growth is recovering and accelerating. The simplest explanation is that too much new income is going to capital, not enough to labor, creating a vicious cycle in which investment in wage-expanding consumer products and services (the Main Street economy) is undermined.

Stagnant wages are a problem, but the hidden threat in this mystery dynamic is that the economy has become too dependent on easy capital return for non-wage capital investment. Put another way: if food prices strain most household budgets, the luxury goods and services that provide these high returns will suddenly lose favor, putting major investments at risk.

We need economy-building investments that are not only climate-smart but also conducive to robust investment in the Main Street economy.

A 2014 study by Regional Economic Models Inc. (REMI) showed a steady increase in real income, due to an economy-wide carbon fee and dividend policy.

Together, these adjustments to business as usual will ensure a more agile, innovative, human-scale economy, capable of generating the household economic leverage we need for a full recovery. Whatever “market desire” there is for centralization to create artificial efficiencies for investors, it is decentralized empowerment that will add the most overall value, expand opportunity and secure future prosperity.

This is the core principle that has been lost in the last two decades of capital chasing capital, without regard to living value. When price signals tell the truth about value, and households are able to make smart, informed choices about affordable goods and services, economic prosperity is more secure.

Commodity price shocks should be cause for widespread reconsideration of our structural economic assumptions. We must begin moving to a climate-smart standard of economy-wide resilience intelligence, to safeguard the engines of value we cannot afford to live without.